Keeping the minority investor out

The capital market is booming, share prices of almost all the well-performing companies have soared to an all-time high and many companies have managed to raise public money at a fat premium, even though they are currently loss-making. You would think that Indian companies would be grateful to investors who buy their hype and are willing to bet on the future, but it is not so. A large number of industrialists seem to resent minority investors, who they think get to share their profits and prosperity without having to work for it. Hence, companies are constantly attempting to keep minority investors from getting their fair share or to ditch them altogether.

In the long bear market that preceded this three-year bull run, it had become a fad to de-list companies by buying out minority shareholders through open offers. Many offered an exit price that seemed fair in a depressed market, but resented it when some investors chose to hang on to their shareholding even after companies had delisted their shares. The reasons for de-listing were many. Some companies did not want public money or public accountability any morethese were mainly multinational corporations. Others found it tedious to comply with onerous compliance rules and the demands of quarterly results in a bad market. They de-listed their shares, only with the intention of re-listing these at an opportune time.

The last category makes a mockery of those investors who want to invest for the long term. This lot includes companies such as DLF, Triveni Engineering, Precott Mills and Spencer (of the RPG group). Some of them have already re-listed their shares, while others, like DLF, have drawn up ambitious IPO plans. In each case, the promoter group will be substantially wealthier in terms of the market valuation of shares.

Companies trying to de-list their shares were outraged when in-vestor associations demanded a transparent price discovery mecha- nism that allowed investors to determine the exit price. Their retainers ar-gued the case and insisted the reverse book-building me-chanism for price discovery would never work.

That is now history. In a booming market, corporate India is queuing to list or re-list their shares at the best possible premium. But the game, to many, is simpleraise money in a bull run and de-list the shares during a prolonged slump, since it ends public accountability, scrutiny and compliance requirements. Some companies mop up retail share holding when prices are heavily depressed. Others manipulate and restructure operations to ensure that any unforeseen windfall, such as the re-rating of realty holdings, do not have to be shared with all shareholders. Alembic Glass Ltd is the latest example, where minority shareholders have written to the Securities and Exchange Board of India (Sebi), complaining about a proposed anti-investor restructuring plan. They say that Alembic Glass wants to merge the listed company with an obscure, loss-making, privately held group company (Shreno), at a patently unfair valuation commissioned by the company. This all-egedly does not take into account the true value of 150 acres of land that it owns on Whitefield Road at Bangalore, near the international airport. Share-holders estimate the value of Ale- mbics land at Rs 1,200 crore.

Companies conspiring to oust minority shareholders usually have little or no institutional holding. And, retail investors find it difficult to get together

The investors have told Sebi that the promoters of Alembic already hold a hefty 71% of the equity. After the unfair merger, their holding would increase to 89%. The next step, they fear, will be a threatened de-listing of the shares, so that the realty value is unlocked only when the company is privately held. Alembic has apparently used an ongoing dispute with ONGC and a liability of Rs 20-30 crore as the excuse for its proposed merger. However, shareholders argue that the merger does not mitigate the liability, which has already been fully provided in its accounts.

Similarly, Nalwa Sons, holding company of the Jindal Group, is also involved in a major attempt to dilute minority holding. Its modus operandi was to give away a bonanza of nearly Rs 100 crore (in terms of market valuation) in the guise of an employee stock purchase scheme, by allotting shares to 19 newly recruited employees. A group of non-resident Indian minority shareholders have taken the case to the Company Law Board. Sources say this was the first step in an attempt to restructure promoter holdings in the Jindal group.

The question is, if holding companies do not want all investors to benefit when share value is unlocked, why allow them to raise public money at all

Companies that conspire to oust minority shareholders usually have little or no institutional holding. Consequently, retail investors who are dispersed across the country find it difficult to get together to file litigation, which in any case is expensive, time consuming and too much of a gamble. Letters to regulators also have limited valuethey only set off a debate over whether Sebi should deal with the issue or the ministry of company affairs.

Investment bankers, who earn their fees by helping companies to raise money at the best price, are also the ones who advise them on throwing out minority shareholders at the lowest cost, during the delisting process. Yet, they also have an important role in framing regulation. Is it any wonder that regulation to check market excesses are invariably in the nature of bolting the stable doors when it is no longer relevant to investors